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The issuance of offshore yuan debt, or so-called dim sum bonds, is expected to remain sluggish in coming months, thanks to the tight supply of the mainland currency and increasing access to the onshore bond market, participants said.

Latest research results from data supplier Dealogic show the amount of money raised in the global dim sum bond market slumped to a four-month low of US$478 million last month, weighed down by a waning investor appetite for such debt amid a credit crunch on the mainland.

Average bond yield rose to 4.3 per cent last week from 3.88 per cent in April because of reduced demand for the notes, and market participants expected demand to remain sluggish even as the yuan continued its steady appreciation against the US dollar.

Among the most important factors affecting demand, they said, were new regulations letting foreign investors use the QFII scheme to invest in China's onshore bond market directly.

Omar Slim, a senior portfolio manager at State Street Global Advisors, said: "The onshore bond market offers better yields than the CNH [yuan traded in Hong Kong] market and no doubt it takes some of the shine from the latter."

In March, the People's Bank of China unveiled new rules allowing QFII institutions to access the interbank bond market. Until then, foreign investors were only allowed access to the exchange-traded bond market.

Although investors can now access both the onshore and offshore markets, since they had a limited amount of yuan they "would go for assets that generate better yield", Slim said.

Weak demand is already affecting issuance. Just one corporate dim sum deal was completed last month, a US$292 million issue from US earthmoving equipment maker Caterpillar.

Fidelis Oruche, the head of trading advisory and product development at Bank of Singapore, said: "We do not view the coupon returns offered by dim sum bonds as particularly attractive relative to those offered by similar issuers in other major currencies. We see a clear preference for US dollar-denominated bonds.

China's onshore bond market is now the fourth-largest in the world at about 21.73 trillion yuan (HK$27.47 trillion) as of the end of last year, a report by Goldman Sachs said.

Slim said: "A way for the CNH market to develop is to complement the onshore market, to have more diversity in terms of the issuers, to have the types of products that are not available in the onshore market, and to have stronger corporate governance [for issuers]."